One of the most frequently asked questions is how Lendahand selects new projects for our platform. Find out in detail how we go about it and what the due diligence process looks like before a project is available for you to invest in.
Every project we offer is either for a microfinance institution (MFI) or a company:
- An MFI is an organization committed to assisting typically poor households and small entrepreneurs and enterprises in gaining access to financial services. MFIs operate mainly to serve those who typically face severe barriers to accessing financial products, making them different from purely commercial financial institutions whose primary goal may only be shareholder value.
- The individual companies we work with are typically privately owned for-profit companies that are generating revenues of at least 1 million euros per year, and have assets of at least 5 million. However, these companies must also demonstrate some form of significant social impact, whether via job creation, improving gender equality, access to sustainable energy, or in various other ways as measured by the UN’s Sustainable Development Goals (SDGs).
As a crowdfunding platform for entrepreneurs in developing countries, we work to offer a diverse portfolio of these companies and institutions to our crowd of investors. Within Lendahand, our Investments Team - consisting of 8 people - is responsible for this. Every day, they work on monitoring existing, and finding and screening, and monitoring new offers for the Lendahand crowd.
How do we go about it?
A thorough investigation precedes the admission of a financial institution or company on the Lendahand platform. As a social enterprise, we place quality over quantity. As a result, it sometimes takes months (up to a year) before a new company appears on our platform. In doing so, we want to guarantee as much as possible that our crowdfunding activities actually reach those entrepreneurs who need it most and that the financing affects them positively.
Due Diligence and Approval Process
Lending to companies is done only and exclusively after extensive due diligence and both an internal and external approval process. Broadly speaking, this process is as follows:
1. (Digital) introduction with a potential new borrower, gather basic information
2. Check by the Head of Investments at Lendahand if the borrower meets the minimum credit requirements
3. First impact screening by the Impact Committee to determine the impact made by the potential borrower (*the Impact Committee consists of 4 people, out of which 3 people are not in the Investments Team)
4. Collect documentation:
- Financial statements last 3 years
- Recent management information
- Financial model
- Policy documents (HR policy, security, risk management, and others)
- Product catalog (offer of the borrower)
5. First negotiation to come to an offer (Term sheet)
6. After approval of the Term sheet, follows an analysis of the documentation from step 4 and the due diligence interviews (digitally or in person) with:
- Top management
- Board of directors or shareholders
- Other creditors of the borrower
- Customers and/or suppliers
7. Second memo or approval by the Impact Committee
8. Fill in the credit score model to estimate risks
9. Draft investing memorandum, with amongst others:
- Description of the company or (financial) institution
- Macro-economic analysis
- Financial analysis
- Regulatory framework
- Analysis of the company’s governance
- Impact analysis
- Pricing analysis based on an internally developed credit score model
10. Discussion of the investment memo with the external Credit Committee consisting of highly experienced investment professionals
11. Recommendation from Credit Committee and Impact Committee to the Lendahand board (3 people reviewed by AFM and DNB)
12. Approval of the company by the board
Know Your Customer and Completion
13. Collect and submit all Know Your Customer documentation (KYC) and anti-money laundering procedure to our Payment Service Provider (Intersolve)
14. Check whether the country in question is on one of the five sanction lists used, whether the directors of the company in question appear on a sanction list, and whether (one of) the directors is a Politically Exposed Person (PEP); these are usually politically active persons.
15. Approval by Intersolve, after which all documentation can be drafted that is offered with all new projects. After this, we can get started.
Our team periodically re-evaluates borrowers’ operations. Before each new project of a company can start, several checks are performed again:
- Is the borrower still in compliance with the contractual covenants?
- Is there any reason to believe that they could not meet the repayment obligation?
- Is the information document still up to date?
- Is the new project (in terms of amount) still within the facility contractually agreed upon?
How does Lendahand make sure entrepreneurs don’t pay too much?
It is Lendahand's mission to fight poverty by offering affordable financing to entrepreneurs in emerging markets. With that financing, they can grow and create more jobs in their local communities. Now, affordable is a stretch in developing countries, but it's really important for us to be convinced that the MFI is charging manageable interest rates. Either way, our aim is always to be the most affordable alternative.
In that context, we ask the following questions to borrowers, among others:
- What is the effective interest rate you charge your clients (Annual Percentage Rate, or APR)? (They often advertise with a ‘flat rate’, which doesn’t include supplementary costs, which we also consider.)
- How many outstanding loans can clients have?
- How do you analyze clients?
- Is there a loan registration system in the country in question (like the BKR in the Netherlands)?
- What is the borrower’s vision when it comes to interest rates in the near future?
- How will they try to lower interest rates structurally?
Unfortunately, it’s impossible to prevent a potentially negative effect from slipping through the analysis, but generally we base our opinion on company policies, trust in management with whom we have extensive personal contact, and talking to customers when we visit. During these visits, we always try to visit at least 5 randomly selected entrepreneurs.
No matter what, our goal is always to be the most advantageous alternative for entrepreneurs who are looking for growth financing. Lendahand's revenue model comes from fees from borrowers. The average margin is 3%, capped at 4%.
Countries on the sanction list
As mentioned in step 13, Lendahand (via Intersolve) works with different sanction lists, drawn up by national and international regulators, naming countries such as North Korea, Syria, and China, and at least another 40 other countries. Since 2022, Lendahand has the European Crowdfunding license. Because of this permit, the European Commission's sanctions list has become even more important, as it includes countries such as Cambodia, Uganda, and Nicaragua. This means that we can currently no longer enter into new collaborations with institutions in these countries because there is insufficient policy against money laundering and terrorist financing. Repayments on current projects in these countries can, however, continue as usual. As soon as a country put things in order and are re-evaluated positively, the country will disappear from the list and we will be able to offer new projects in that country again.
Repayment requirements for SME entrepreneurs
If an end client of a financial institution is not doing well operationally and financially, our borrowers have certain requirements. We assess these as well, as they often include collateral. Almost all (micro)finance institutions require collateral before providing a loan. We screen how MFIs implement these collateral requirements with their clients. Among other things, we do reference checks with other funders, such as Accial Capital for example. We do not deal with parties who, in our view, act aggressively.
The Lendahand commitment
With Lendahand, we try to fully minimize the risk of abuse in our portfolio by following the roadmap described above. We believe that microfinancing if done fairly and affordably, is an essential tool in the fight against poverty in the way founder Muhammad Yunus once conceived it.